Cheap to borrow; almost impossible to get a good return.

Photographer: Simon Dawson/Bloomberg

Europe's Bonds Are Unyielding

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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With central bank interest rates at or near zero in many parts of the world, borrowing costs for governments and companies have plunged to record lows. In Europe, corporate bond yields are now so low that it’s hard to see how fixed-income investors will be able to make money. It's also difficult to imagine that yet more cheap cash from the European Central Bank will arouse the region's animal spirits.

Here's a chart breaking down the region's universe of benchmark investment-grade bonds by yield, courtesy of Suki Mann, the head of European credit strategy at UBS in London. Mann's astonishing conclusion is that more than half of the market currently offers yields of less than 1 percent:

Digging into the data reveals that not only have those yields plunged in the past two years, the potential income from buying bonds repayable in three years or less is even lower:

As yields decline, prices rise, so investors have made money this year; Mann estimates a total return of 7.5 percent. At ever-lower yields, though, the potential to generate profit is diminished. Even with an additional drop in 2015, Mann expects investors will only make 2.5 percent -- a best-case scenario that starts to make it hard for pension funds to meet their obligations without chasing higher returns in riskier investments.

And the thing with bonds is, they mature. Provided they don't go bust, companies repay their debts. And then investors have to find something else to do with the cash that flows back to them.

Mann expects investors to get back more than 125 billion euros ($156 billion) next year, compared with new investment-grade sales of about 200 billion euros. Even the minimal interest rates available from corporate bonds are likely to prove a more attractive destination for reinvested proceeds than paying for the privilege of lending to the German government at negative yields:

The backdrop argues against the ECB adding corporate securities to its bond-buying program, which is currently restricted to covered bonds and asset-backed securities. Those companies able to access the bond market can already do so at record-low borrowing costs; central-bank buying would just suck supply out of the market, hurting investors without helping the real economy.   

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To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
Paula Dwyer at pdwyer11@bloomberg.net